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What I Learned by Getting Locked Out at CERAWeek: Gadfly

(Bloomberg/Bloomberg)

By Liam Denning | BloombergBy Liam Denning | BloombergMarch 8

Let me tell you about some possibly great presentations I didn’t get to see this week.

Truly, they sounded awesome for anyone interested in energy. One was on cloud computing revolutionizing the oil and gas industry, featuring heavy hitters from Alphabet Inc. and Schlumberger Ltd. Another, hosting the chief digital officer of a national oil company (not a phrase I’m used to typing) was about digitalization transforming this most mature of industries.

Fascinating stuff (probably) that I didn’t get to watch. The presentations were full, you see.

One of the more notable things at this year’s CERAWeek — an energy conference in Houston organized by IHS Markit — was the popularity of the technology sessions. Last year, getting a seat at them was easy. This time, it often paid to get there early just to nab a standing spot.

Two lessons from this most anecdotal of evidence. First, I need to run faster at conferences. Second, the walls seem to be closing in on OPEC.

One reason those sessions were full is there were simply more bodies; I’m told CERAWeek attendance rose maybe 15 to 20 percent this year to its highest ever. IHS should send flowers to Vienna and maybe Moscow, too, because the supply cuts from OPEC and Russia have helped push oil above $60 a barrel (and ticket sales above 4,000).

Mohammad Barkindo, OPEC’s secretary general, summed this up on day one of CERAWeek, when he noted from the stage that the food just served to attendees was richer than last year (which goes to show there is such a thing as a free lunch, or at least one paid for by OPEC). He also said OPEC had “almost surpassed” -- met? -- its own expectations on cuts. This was no doubt supposed to project confidence; one important member of the group has an upcoming IPO, after all.

Maybe it was the acoustics in the ballroom, but to me it sounded more like delusion.

A year ago, I wrote about Barkindo’s frustration with the competitive chaos of the North American tight-oil boom. Even then, the less-crowded tech sessions signaled the threat posed to OPEC’s control by a swarm of rival oil producers enabled by a bigger swarm of technology firms.

Since then, oil is up roughly $10 a barrel, or 18 percent. Meanwhile, the U.S. oil-rig count has jumped about 30 percent and domestic production is set to hit a new record in 2018. Earlier this week, the International Energy Agency forecast that extra supply from non-OPEC countries, especially the U.S., would be enough to cover the world’s extra demand expected through the end of 2020.

If that pans out, then OPEC is in deep trouble. Supply cuts to date owe much to the catastrophe engulfing founding member Venezuela and the co-operation of Russia. We are now 14 months or so into the process and oil prices are up but still less than what most members of OPEC need. Now, they face another three years of trying to hold the line.

That’s a losing proposition. History shows restrictive commodity agreements tend to age in dog years. Russia, especially, looks very unlikely to continue holding back its domestic companies’ expansion plans beyond 2018.

It should be obvious by now that every year of extra supply cuts keeping oil prices artificially elevated allows rival producers to take market share -- and, more importantly, refine their methods and adopt new technologies.

Artificial intelligence and digitalization were inescapable at this year’s conference -- which means, of course, there’s a lot of hype. Morag Watson, BP Plc’s chief digital officer, says about 80 percent of the companies coming to her touting AI solutions are really just offering plain old computing wrapped in a buzzword.

The other 20 percent still matters. For an industry this big and complex, oil and gas is surprisingly virgin territory for this stuff. Peter Terwiesch, who runs ABB Ltd’s industrial automation division, puts oil and gas close to the bottom of the curve in terms of adopting digitalization, just behind that dynamic sector called utilities.

Moving up that curve will reinforce what’s been happening already in this industry, especially in tight oil: pushing down the cost curve. And this is before we even get into how other technologies will erode demand growth. Besides Mary Barra, CEO of General Motors Co., most of the other speakers on the main stage at CERAWeek, hailing from the oil and gas industry, tended at best to welcome electrification in the way one might welcome a particularly obnoxious relative into one’s home.

The essential context for all the hype at CERAWeek, however, was the lack of it once you stepped outside the conference, or looked at your trading screen. If digitalization was the buzzword, then disinterest was the unmentioned keyword.

A bull looking at that chart might see capitulation in energy stocks and, therefore, a buying opportunity (and the opposite for those high-flying tech stocks). It’s a valid argument.

The other way to think about it, though, is that U.S. oil production is surging despite financial markets’ indifference. As it is, chastened oil firms are focused on doing more with less, and starting to use newer technologies to keep that process going. OPEC needs to think about what animal spirits, and drilling budgets, might be unleashed if oil was at $70-plus.

Amid all this, OPEC’s representatives at CERAWeek spent time hosting E&P executives and hedge fund managers for secretive dinners in order to “learn” more about this whole shale thing. Their forecasters, meanwhile, continue to project U.S. output dipping toward the end of this year, in marked contrast to other analysts. I may have a missed a few interesting sessions this week, but the guys from Vienna appear to be missing the point entirely.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal’s “Heard on the Street” column. Before that, he wrote for the Financial Times’ Lex column. He has also worked as an investment banker and consultant.

To contact the author of this story: Liam Denning in New York at ldenning1@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.